Finally, a clue about what will happen with the estate tax!  David Axelrod, Senior Advisor to president-elect Obama, made the rounds on Face the Nation and Meet the Press last weekend.    He was asked specifically if he would raise taxes on the wealthy by reversing Bush's tax cuts.  His response was telling.  He referred to the tax cuts as "something that we plainly can't afford moving forward."  He was unequivocal about the plans to end Bush's tax cut package saying "it is going to go...it has to go."  He did not take a definitive stand on whether it will be allowed to expire or whether it would be repealed early.  So, now we know that Obama plans to get rid of the Bush tax cuts in short order.  What does that mean and how does that affect you?

I do estate planning so I will only address what this means for estate planning.    Under the current Bush tax package the estate tax threshold goes up to $3.5 million for 2009.  That means that if you have less than that amount you can leave it estate-tax free upon your death.  That high level leaves most families untouched.  Then, in 2010 the estate tax was set to disappear completely.  That means no estate tax for any amount in your estate.   That law sunsets in 2011 and resets the estate tax down to the $1 million level.  This low level sweeps in many people who never needed tax planning before.  Many people in this range do not even realize that their estates are this large.  It is common to think of your estate as only consisting of your most tangible assets such as your home, retirement accounts and bank accounts.  However, in considering your estate there are other assets that you may not think of as yours that would be counted toward your estate.  There are several but, the most common is life insurance.  If Obama lets the estate tax drop down to $1 million many middle class families will need estate planning once they take into account their life insurance (unless they are underinsured which is far more catastrophic than being subject to the estate tax.)  So, now what?  Maybe you are going to be exposed to the estate tax but, what do you do about it?

First, consult with your estate planning attorney so you can find out for sure if you will be exposed.  Second, if you are in estate tax range, do the tax planning.  Tax planning, as scary as it may sound, is much cheaper than the estate tax.  Your estate planning attorney should be able to give you a specific cost/benefit of your plan to show you how much you can save.  To give you some idea of the potential savings up front, the tax rate for assets over the threshold has been in the 45% to 55% range.  That means you would lose roughly half of everything over the threshold.  That makes tax planning an unbelievable bargain.  And, even if you are not in estate tax range, having a basic estate plan will save you money over not having a plan at all because you can waive or eliminate some of the most costly probate requirements.